Chinese corporate bond’s yields spike signalling more stimulus is needed

Bonds
Althea Spinozzi

Senior Fixed Income Strategist

Summary:  Investors crowded the issuance of euro-denominated Chinese government bonds yesterday, pushing yields of 5-year notes below zero. They might be betting that the People's Bank of China will ease the economy further even though it seems on the way to recovery. Indeed, some signals in the corporate space point to troubles ahead. Industrial corporate yields spiked this month signalling more defaults, which might ultimately weigh on the financial system. At the same time selling momentum in Chinese government bonds is picking up. A spike in government bond yields might deteriorate further corporate spreads, and the central bank might not have other option than intervening.


Yesterday, China issued for the first time in a year euro-denominated debt. The offering amounted to €4bn spread across 5-, 10- and 15-year maturities, however, attracted more than €17bn in bids. The new bonds add to the €4bn notes issued last year across 7-, 12- and 20-year maturity.

Interestingly, the 5-year bonds were issued with a negative yield of -0.15%, while the rest of the debt offering carried a positive yield yet, well below 1%.

Besides the Chinese economy's recovery story, there might be another reason behind the high demand in Chinese sovereigns. Indeed, the recent spike of Chinese Industrial corporates' yields shows that there are troubles ahead and that the People’s Bank of China (PBoC) will need to stimulate the economy further to avoid a liquidity squeeze within the corporate bond space.

The sudden spike of corporate bond yields is happening precisely at the same time as yields in China’s 10-year government bonds are rising. To put more pressure on increasing yields, the Relative Strength Index (RSI) shows that the 10-year sovereigns are overbought and that selling momentum is approaching.

Source: Bloomberg

It is therefore doubtful that the PBoC will stay watching as a selloff in Chinese sovereigns might correspond with a fast widening of Chinese corporate spreads.

According to the latest annual Financial Stability Report published by the PBoC in November, the non-performing loan (NPL) ratio of 30 sample banks is expected to surge around 5% at the end of this year, 5.5% in 2021 and 6.7% in 2022. These numbers are well above the 1.5% recorded at the end of the first quarter of 2020. Higher NPL numbers don't constitute an issue only for the corporate space, but also for banks. The report shows that a third of the Chinese banks monitored by the PBoC's fail the central bank's stress test. A big part of them needs to raise capital or loss-absorbing debt to fulfil their total loss-absorbing capacity (TLAC).

It explains why just a couple of days ago, the PBoC has injected 800bn yuan in the Medium-term Lending Facilities (MLF) in the credit market. Even though a few days ago, Guoqiang Liu, vice governor of the PBoC,  said that the central bank would "sooner or later exit" stimulus policies set in place for the Covid-19 pandemic, it is clear that at the moment it would be risky for the central bank to taper.

The question is whether the PBoC might tighten the economy further in order to avoid rising defaults which would inevitably weigh on the financial sector.

So far, the message of the central bank seems to steer away from a dovish tone. However, the facts are pointing to more stimulus. Bloomberg reported today that the PBoC had injected 70bn yuan into the banking system using 7-day reverse repurchase agreements to increase liquidity in the market. It definitively doesn't look like a central bank that is on the verge of easing the economy, and investors might be right to see an upside Chinese sovereigns.

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide and Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.